LH

QRB 501

January 13, 2014

Steve Spencer

Capital Budgeting Case

Capital budgeting is the development which organizations implement in appraising and selecting continuous investment projects. Capital budgeting investments consisting of capital equipment, purchases, and leasing of buildings, vehicles, etc. Techniques used in capital budgeting: net present value, internal rate of return, profit index, discount period, and loan period. In determining what technique to implement in capital budgeting decision-making, it is essential to understand the calculation such as the “Net Present Value (NPV) and Internal Rate of Returns (IRR).”

Net Present Value

“The net-present-value (NPV) method of selecting capital budgeting projects is also commonly referred to as “discounted cash flow,” “DCF analysis,” “discounted present value,” and “present-value analysis” (Droms, 2003, para. 4, p. 187). The NVP is the sum of outlays incoming and outgoing consisting of the same entity. The weight average cost of capital budgeting and the t-values of incoming cash change with the present values of outings, which the outcomes is the NVP. Whenever the NVP of any project or investment is positive only the project is agreeable. The NVP is the most reliable source of calculation because of accurate results. Changes occur when the discount rate changes, .e.g., the present value on the NVP for corporation (A) $20,980.32 at 10% and corporation (B) $40,525.02 at 11%. When the cash flow change, the NVP changes as well. According to Droms (2003), “If a choice must be made between two mutually exclusive projects, the project with the highest net present value should be selected.” In this case, corporation B has the highest NPV, and is a recommendable company.

“The Internal Rate of Return (IRR) is normally calculated in addition to the net-present-value calculation. The IRR equates the present value (PV) of the expected benefits from a project to the cost of the...